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When 'Rich' Isn't

Today, June 29, 2011, President Obama had a press conference to address the U.S. budget mess. During his opening statements and throughout the questioning, the president kept saying that "millionaires and billionaires" needed to pay their fair share. It's a favorite phrase of the president and one Andrew Ross Sorkin addressed earlier this year.

Pres. Obama might talk about the "wealthy" but he really means those with annual incomes over $250,000. Problem one with "wealthy" is that many wealthy, especially billionaires, don't have incomes. They earn capital gains and have investments, but they don't get weekly paychecks like the rest of us. Since we have an income tax, those can't be the men and women the president wants to tax. Problem two? The wealthy, at $250,000 a year, aren't all that wealthy in the cities where they are most likely to live.

Rich and Sort of Rich

May 14, 2011

By ANDREW ROSS SORKIN

How did $250,000 become the magic number?

In the debate over how to close the budget deficit, President Obama talks often about raising taxes on "millionaires and billionaires," but his policy prescription is a bit different. He says that federal income taxes should be increased on families making more than $250,000. That seems to be the threshold. Under $250,000, you're middle class; over it and you're wealthy.

… Only 2 percent of households in the nation make more than $250,000, according to the Internal Revenue Service. But some economists and tax reform advocates are questioning whether those households are rich enough to be worthy of the same tax bracket as millionaires.

"The very round nature of it suggests that it's arbitrary," said Roberton Williams, a senior fellow at the Tax Policy Center and the deputy assistant director for tax analysis at the Congressional Budget Office from 1998 to 2006. "There's nothing magical about $250,000 per year. It has no economic basis."

So we have a "magic number" of $250,000 that is somehow associated with "millionaires and billionaires? How did that happen? It happened because there aren't enough super-wealthy to pay for much of anything, as I've discussed before:

To bring in real tax revenues, you have to tax well below the millionaire line, down into the $75,000 annual income (or lower) range. Believe it or not, there aren't that many rich to tax. All their annual earnings wouldn't pay for much of anything at current federal spending levels. You'd have to start confiscating possessions to even make a dent in the federal budget.

Ironically, most of the "rich" live in bright blue urban areas. In those areas, annual incomes often average more than $60,000. And yet, you can't live well on $60,000 in these places. Consider this analysis from the New York Post:

Then there's the cost of living in New York City. A 2009 report by the Center for an Urban Future found that "a New Yorker would have to make $123,322 a year to have the same standard of living as someone making $50,000 in Houston. In Manhattan, a $60,000 salary is equivalent to someone making $26,092 in Atlanta." Even Queens, the report found, is the fifth most expensive urban area in the country.

As Sorkin points out in the New York Times:

Mr. Obama started using the $250,000 household income level to define wealthy Americans during his campaign in 2008. Under his budget proposal, a target of the Republicans in recent weeks as part of a fierce battle over raising the debt ceiling, the tax cuts enacted by his predecessor, President George W. Bush, would be reversed for those households. Mr. Obama's proposed top household income tax bracket — starting at $250,000 — would pay 39.6 percent on federal income. (Single filers making $200,00 or more would also be in the highest bracket.) Currently, the highest tax bracket starts at $379,150, and they pay 35 percent.

The president and his wife are wealthy. Good for them. They've worked hard, earned money, and invested. That's fine. But they seem to have forgotten that $250,000 wasn't that wealthy in part of Chicago. At the very least, the president should admit that inflation has changed where "rich" would be if we looked back at the Clinton years.

$250,000 isn't what it used to be. If Mr. Obama were really trying to return to Mr. Clinton's 1993 levels, he would have to adjust the bracket for inflation, moving it up to about $386,075. In fact, in Mr. Clinton's last year in office, the top bracket had risen to $288,350 from $250,000.

Another little tidbit of note: when Clinton occupied the White House, less than 1% of Americans earned more than $250,000. Today, that number is over 5% — even after the recession. Why is that? Because we do have an expanding wealth gap. It is a geographical gap, too, though, and one that complicates discussions of wealth inequality. Again, New York isn't Kansas and California isn't West Virginia.

Then there is the problem of keeping up with the Joneses. In 1993, earning $250,000 was a more exclusive club, making it easier to feel like one of the wealthy. Back then, households making more than $200,000 represented about .08 percent of the country.

And today, $250,000 households tend to be clustered on the coasts, where there are often better-paying jobs.

The Fiscal Times, a publication financed by Peter G. Peterson, the very public deficit hawk and former commerce secretary under President Richard Nixon, commissioned BDO, an accounting firm, to look at how households that make $250,000 fared in different parts of the country, mostly in middle- to upper-class neighborhoods.

The takeaway, according to the study: "It's not exactly Easy Street for our $250,000-a-year family, especially when they live in high-tax areas on either coast."

So where should we be looking for taxes? It turns out we should be looking at the top 400 earners. But, that would mean changing the capital gains tax rates, not the income tax rates. Ironically (or not?) the top 400 are overwhelmingly from the investment class and a majority donated to Pres. Obama, as I've written recently.

It wasn't even close in terms of donations in the last election cycle. The investors gave nearly 2:1 to Obama. So, don't expect a capital gains tax change to make it the same as the income tax. Won't happen anytime soon. I don't like overly-progressive tax rates. I'd like simple, no-deducation tax rates. But the game played with capital gains does shift the tax burden downwards onto the "barely rich" like working lawyers, doctors, professors, and others. That's not fair, either.

The wealthiest 400 Americans in the country paid, on average, a rate of only 16.6 percent, according to the latest report from the I.R.S. that examined returns from 2007. That is because much of the income of the country's wealthiest people comes from investments, which is taxed at the long-term capital gains rate of just 15 percent.

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